Brazil basks in record Petrobras deal

SAO PAULO (Reuters) - President Luiz Inacio Lula da Silva hailed a “new chapter in Brazil’s development” on Friday after state oil company Petrobras sold $70 billion in shares at a higher-than-expected price, a record deal that could make the country one of the top global energy exporters.

Clad in a bright-orange Petrobras jumpsuit and hard hat, Lula played down concerns about the state’s expanding role in the company and told a gathering of business leaders at the Sao Paulo stock exchange that the resulting windfall should help propel Brazil closer to its dream of developed-world status.

“God has been very generous with the Brazilian people, who have long waited for the chance to be as respected in the world as we are today,” Lula said to cheers and applause.

Thursday’s stock sale, greeted by heavy demand from investors ranging from U.S. mutual funds to Middle East sovereign wealth funds, amounts to a heavy bet on one of the world’s biggest recent oil finds.

The cash generated by the world’s biggest-ever stock offering is part of Petrobras’ $224 billion investment plan over the next five years to exploit the so-called subsalt area, a reserve discovered off Brazil’s southern coast in 2007.

It contains up to 50 billion barrels of difficult-to-extract but high-quality crude under a thick layer of salt four miles beneath the ocean’s surface.

The $70 billion deal roughly comprised $27 billion of cash and $43 billion of oil that the government swapped for Petrobras shares.

Petrobras shares sagged a bit in Brazil as traders took profits after months of lead-up to the deal. Preferred shares PETR4.SA were down 0.9 percent and common shares PETR3.SA slipped 1 percent in early afternoon trading. The company's American Depositary Receipts PBR.N rose 0.2 percent in New York.

The sheer magnitude of the transaction has caused Petrobras to affect virtually every other sector of Brazil’s economy, including foreign exchange markets.

The real strengthened slightly on Friday as traders anticipated a massive influx of foreign dollars associated with the Petrobras deal.

Central Bank President Henrique Meirelles told reporters in New York on Friday that the deal had already brought exceptionally heavy dollar flows, moments after broadly warning investors about the dangers of a potential credit bubble in Brazil’s booming economy.

A Petrobras Oil platform is seen at Guabanara bay in Rio de Janeiro, March 26, 2010. REUTERS/Bruno Domingos


Brazilian capital markets also were preparing for a wave of transactions by other local companies now that the long-awaited sale had passed.

The transaction fulfilled Lula’s goal of increasing state control over Petrobras, which he and Dilma Rousseff, his likely successor as president next year, see as critical to ensuring that Brazil reaps the maximum benefits from the subsalt find.

The government boosted its stake in Petrobras through a complex transaction by which it gave the company exclusive access to 5 billion barrels of subsalt oil in exchange for shares. Some analysts complained that the oil-for-shares swap was detrimental to minority shareholders because the oil was valued at a higher price than investors expected.

Finance Minister Guido Mantega said the federal government, acting jointly with Brazil’s sovereign fund and state companies and pension funds, had increased their combined stake in Petrobras to about 48 percent from 40 percent. The federal government alone had 32 percent of the company’s capital before the deal.

“The deal was a huge success,” Mantega said. He ruled out any risk of a so-called oil curse in Brazil, which plans to set aside the lion’s share of the revenue for long-term investment in roads, schools and other infrastructure.

The state’s heavy hand in the transaction had rattled investors for months prior to the deal. Analysts said that risks lie ahead for Brazil as euphoria brings its inevitable consequences.

“Euphoria could lead to excess comfort, which in turn could result in serious economic imbalances,” said Luiz Alberto Machado, deputy head of the economics department at Sao Paulo-based university FAAP.

Machado said politicians would need to address risks such as excess fiscal spending or current account imbalances that could result from the deal.

The oil company’s preferred shares had slumped 27 percent since the start of 2010, partly because of concerns that Petrobras’ plans to expand in labor-intensive but less-profitable areas such as refineries were designed to satisfy Lula’s political objectives instead of minority shareholders.

Despite the concerns, Petrobras was able to sell 1.87 billion preferred shares at 26.30 reais each and 2.4 billion common shares at 29.65 reais -- a smaller-than-expected discount of 2 percent discount to Thursday’s closing price.

The stock sale, which was larger than what the Rio de Janeiro-based company originally planned but below the maximum it had filed to sell, had total demand of $87 billion, a source with knowledge of the deal told Reuters on Thursday.

The deal easily topped Japanese telecommunications firm NTT's 9432.T $36.8 billion 1987 share sale and Agricultural Bank of China's 601288.SS $22.1 billion initial public offering this year.

Additional reporting by Elzio Barreto, Writing by Brian Winter; Editing by Todd Benson, Lisa Von Ahn and Steve Orlofsky